The political situation in Venezuela has remained highly polarized since the opposition picked up a two-third majority in the national assembly elections last December. Considerable conflict between the presidency and the opposition has become the norm, with the government successfully (though perhaps only momentarily) stripping the opposition MUD alliance of its two-thirds super-majority, while opposition leaders promise to depose President Nicolas Maduro as soon as possible. All of this is occurring while a deepening recession and falling oil prices call for major corrective measures to be taken by the government.

Even worse for multinationals (and Venezuelans) is that despite declaring an economic emergency, President Maduro has chosen to deepen his commitment to the Chavista economic model, electing advisors that would only double-down on current economic policies, despite persistent failure and worsening external conditions. With oil prices falling to less than US$30 per barrel and over US$10 billion in sovereign debt payments due in the second half of 2016, Venezuela is increasingly courting an even worse economic disaster and significant social unrest.

Given the government’s unwillingness to pursue adequate corrective measures at this point (despite the severe electoral drubbing it received last year largely due to its economic policies), the only hope for a reversal of the current situation is a democratic transition. The opposition is highly likely to attempt to revoke President Maduro’s current mandate as soon as April, and it is probable that President Maduro will combat any attempt at a referendum on his rule through both legal and extra-legal means, thus setting the stage for a turbulent year ahead. Additionally, with few necessary corrective fiscal, monetary and exchange rate measures being pursued, economic conditions are highly likely to deteriorate further, even if oil prices were to recover significantly (which remains highly unlikely).

FSG’s baseline scenario for Venezuela entails the following:

• Prolonged economic collapse: Severe economic deterioration, with the likelihood of a sovereign default increasingly likely, and hyperinflation increasingly a danger as oil prices remain low. Consumer purchasing power will be progressively precarious and investor sentiment falls further into the abyss.
• Severe political polarization and gridlock: Discord between the legislative and executive branch leading to a severe institutional crisis, with the end result being either the removal of President Maduro from power, or an unconstitutional revocation of powers of the legislative branch.
• Worsening social conditions: Increasing risk of social protests, particularly if the opposition is stymied from leveraging its legislative majority to implement any policy changes by a recalcitrant government.

Multinationals will need to lower their already low expectations for Venezuela over the medium term. For FSG clients committed to the market, our report Managing Risk in Venezuela can offer a set of best practices to continue navigating this market while current economic conditions persist.

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